The TSX opened higher Friday morning, and the sector map tells the story more clearly than the index level does. Canada confirmed a technical recession before the open. A 60-day U.S.-Iran ceasefire extension that would reopen the Strait of Hormuz is taking shape but unsigned. WTI crude was trading at $87.20, down for a third straight session. Gold hit a two-month low Thursday. Against that backdrop, the index opened positive because the market has concluded, at least this morning, that a diplomatic resolution to the Hormuz crisis is worth more to the TSX than the energy sector premium it would surrender.
That conclusion is embedded in the sector rotation visible at the open. Financials are up. Energy is down. Technology is modestly positive. Gold miners are extending Thursday's losses. This is the exact mirror image of the sector rotation that played out in early March when the conflict escalated: then, energy surged, financials fell on inflation and rate concerns, and gold miners rallied on safe-haven demand. The same mechanism running in reverse is what a credible Hormuz reopening looks like in real time.
Energy: The WTI Level That Changes the Math
WTI at $87.20 is still elevated relative to the pre-conflict level of approximately $72 in late February. Canadian energy producers are generating strong free cash flow at this price. The valuation question is not whether they are profitable, it is whether the market will continue to price in a sustained $85-plus WTI environment or begin repricing toward a post-reopening baseline of $75 to $80.
The April 8 ceasefire produced a single-session decline of approximately 15% in WTI, from above $106 to near $90, before prices partially recovered as the strait remained operationally restricted. In that episode, the TSX Energy Index fell sharply in the initial session and then recaptured roughly half its losses over the following three weeks as it became clear the operational reopening was slower than the diplomatic announcement implied. The current session is following a similar early pattern: energy names opening lower but not in freefall, because the market has already priced in significant Hormuz resolution probability over the past week of ceasefire extension reports.
The chart above shows the TSX Composite against the TSX Capped Energy Index since the conflict began February 28, illustrating the divergence that has built between the index-level performance, supported by energy and gold, and the rotation beginning today as those supports potentially weaken.
The TSX Capped Energy Index surged approximately 34% above its pre-conflict level at the peak in early April before the first ceasefire compressed it. The April 8 event marker shows the sharp energy pullback followed by a partial recovery as operational reopening of the strait was delayed. The current ceasefire extension reports are producing a second compression move from the energy sub-index, now approximately 12% above pre-conflict levels.
Financials: The Recession-Rate-Cut Calculus
The big bank earnings of the past week add important context. Scotiabank and BMO posted higher second-quarter profits on stronger net interest income. TD reported a jump in adjusted quarterly profits. National Bank beat estimates despite a 4% selloff in its shares. The banking sector is not in distress, and the recession print that arrived this morning is a macro headline rather than a balance sheet event for the major lenders, at least at this stage.
What the recession print does for financials is probabilistic: it marginally increases the likelihood that the Bank of Canada cuts on June 10. Markets were already pricing a very low probability of a cut at that meeting before the GDP release. A cut would lower the prime rate from 4.45%, reducing the cost of variable rate lending and modestly improving the credit environment. That is a tailwind for the banks, which is why financials are the session's support structure while energy retreats.
The CAD at 0.7251 USD is a secondary confirmation of the market's read. A recession headline without an accompanying ceasefire would typically weaken the Canadian dollar on growth concerns. Instead, the loonie is modestly stronger this morning, because currency markets are pricing the ceasefire's positive effect on Canadian inflation and the BoC's rate path ahead of the recession's negative effect on growth. That is the same logic driving the TSX higher overall despite a GDP miss of 1.6 percentage points versus consensus.
Gold: The Losing Side of the Rotation Today
Gold fell to a two-month low Thursday as ceasefire optimism reduced the safe-haven bid that has supported the metal, and by extension Agnico Eagle, Barrick, and Wheaton Precious Metals, since the conflict began. The metal sits approximately 15% below its early-conflict peak, and the ceasefire extension reports are applying further pressure this morning. Gold's performance over the next several sessions will depend on whether the diplomatic news sustains or falters: if Trump does not sign the deal this weekend, or if IRGC violations produce another escalation during the mine-clearing window, gold will recover rapidly and TSX materials names will follow. That optionality is still in the portfolio, even if it is not being priced today.